Truth obviously lies somewhere, but where exactly? To shed light on this whole issue and help educate the novice, I think we should just take a look at the real picture. Below are some facts from eight of the major direct selling companies’ income disclosures for 2020:

AMWAY

A typical Amway IBO’s (Independent Business Owner) average income in the U.S. was $628 in 2020.

Amway made a payment to 56% of IBOs in at least one month. Of those who received a payment from Amway, the top 1% earned $83,032, the top 10% $13,734 and the top 50% earned $3,149 on the average.

Amway IBOs at the “Founder Platinum” level made $43,337 and those at the “Platinum” level $18,991 in 2020.

Click for Amway’s compensation report.

ARBONNE

A typical Arbonne participant at the “Independent Consultant” rank in the United States averaged $206 in 2020 in earnings and commissions. This group was 56% of Arbonne’s total sales force.

Arbonne District Managers’ average was $2,279, Area Managers’ $13,785, Regional Vice Presidents’ $62,711, and finally, National Vice Presidents earned $253,607 in 2020. National Vice Presidents made up 1% of the field force.

Click for Arbonne’s compensation report.

JUICE PLUS+

Juice Plus+ Qualifying Sales Coordinators made up 20% of the field force and earned $828 on the average. The next level is Sales Coordinators who were 11% of the members, making $3,180.

0.4% of the sales force were at National Marketing Director level and earned $44,988 on the average. Company’s highest level of achivement is “Presidential Marketing

Director+. They were 0.1% of the total members and their average income in 2020 was $343,860.

Click for Juice Plus’s compensation report.

MANNATECH

94% of Mannatech’s field force averaged $2.30 / year. Those at the Gold Associate level were 2% and made $39.64 in 2020. 0.5% were at the Silver Executive Director level and earned $1,254.

Silver Presidential Directors made $15,568. 3-Star Platinum Presidential Director is the highest level of achievement and five people were at this level making $83,441 last year.

Click for Mannatech’s compensation report.

NU SKIN

In 2020, Nu Skin paid approximately $161,333,653 to its Brand Affiliates residing in the U.S.

“Brand Affiliates” who make up 11% of Active Brand Affiliates earned $384 / year on the average. Brand Representatives (3.3%) made $7,392 and Diamond Directors (0.12%) $112,932. Blue Diamond Directors are at the highest level (0.2.%) who averaged $449,688 in 2020.

In the United States, Nu Skin had an average of 84,003 Active Brand Affiliates during 2020. They represented an average of 43.56% of total Brand Affiliates.

Click for Nu Skin’s compensation report.

OPTAVIA

24% of Optavia’s Independent Coaches in the U.S. made no earnings last year and 8% made between $0.1-100.

Yearly average incomes of approximately 13% of coaches were between $1,000-2,500 whereas about 2% of the field force made $7,500-10,000.

Those who earned more than $200,000 made up 0.19% of Optavia’s coaches.

Click for Optavia’s compensation report.

RODAN + FIELDS

90% of those who ordered R + F products in 2020 in the U.S. were strictly customers.

7% were “Product Ambassadors” and were paid between $20 and $41,311.

“Business Builders” constituted the remaining group of 3%. Among this group, “Developing Business Consultants” made between $20-78,442, “Evolving Leaders” $1,932-576,544 and “Advance Leaders” $12,455-2,756,100.

Click for Rodan + Fields’s compensation report.

SCENTSY

Scenty divides its Consultants into two groups in its earnings disclosure: Group 1 consists of Consultants who were with the company for all 12 months of 2020 and Group 2 with less than 12 months.

There were 51,237 consultants in Group 1 whose yearly average earning was $2,901 (minimum $121, maximum $1,282,079).

Group 2 composed of 135,629 consultants. They were paid between $0 and $34,933 (average $452)

Click for Scenty’s compensation report.

There are several significant takeaways from these figures. To me, these statistics once again show three important things:

1) It is actually possible to achieve really high income through direct selling.

2) Not everybody reaches those high levels.

3) In fact, “1” and “2” above are public information that everyone has access to.

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Hakki Ozmorali is the Founder of WDS Consultancy, a management consulting and online publishing firm in Canada, specialized in providing services to direct selling firms. WDS Consultancy is a Supplier Member of the Canada DSA. It is the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.

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Amway reported 2020 sales of $8.5 billion, an increase of 2% over 2019.

Company also announced eight of  its top 10 markets grew in 2020 with sales in the United States growing 10%. Amway’s top 10 markets last year were: China, United States, South Korea, Japan, Thailand, Taiwan, Malaysia, India, Russia, and Hong Kong.

In line with the global focus on health and wellness in 2020, Amway’s  nutrition products accounted for more than 50% of  sales in 2020.

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FTC’s five accusations filed in 1975 against Amway were quite severe:

* Amway was engaged in resale price maintenance.
* Amway allocated customers among distributors and restricted distributors’ source of supply as well as outlets through which they may resell.
* Amway restricted the distributors’ advertising.
* Amway misrepresented that substantial income may be obtained from geometrical increases in the number of distributors in the chain.
* Amway misrepresented the profitability of a distributorship and the potential for recruiting new distributors and failed to disclose the substantial business expense involved and the high turnover of distributors.

After four years in 1979, it was ruled that the company had been conducting a legitimate business but not a pyramid and Amway prevailed.

The significance of this decision for the rest of the direct sales community was that the FTC was making distinctions in its ruling between an illegal pyramid and a legitimate multilevel marketing program. The FTC said “Amway differed in several ways from pyramid schemes that the Commission had challenged. It did not charge an up-front ‘head hunting’ or large investment fee from new recruits, nor did it promote ‘inventory loading’ by requiring distributors to buy large volumes of nonreturnable inventory.”


This did not mean that the FTC had left Amway free of any orders to follow: Amway had to stop retail price-fixing; misrepresenting profits, earnings or sales; allocating customers among their distributors; and had to print a specific disclaimer on its suggested retail price lists. In other words, the ruling didn’t make Amway look very good, but it provided an essential shield to network marketing companies, including Amway itself.

The famous “70% rule” has also been an industry standard or a “Golden Rule” following this case. Amway was requiring from its distributors to sell or personally use a minimum of 70% of any previously purchased products before placing a new order. And this was recognized by the FTC as one of the signs of not being a pyramid scheme.

This case has been considered as the most significant cases in the history of direct selling by many. Jeff Babener, a well-recognized authority in legal issues whom we sadly lost last year, had said, “Had Amway lost, MLM history after 1979 may have been nonexistent. Amway’s victory paved the way for hundreds of MLM companies that would follow. So significant was the decision that the FTC during the next 20 years focused on ‘deceptive’ practices of MLM companies such as earnings representations or medical claims rather than attacking the ‘structure’ of MLM programs.”

The FTC’s Former General Counsel Debra A. Valentine commented in a speech in 1998, that FTC’s decision in 1979 was a “landmark decision” that distinguished an illegal pyramid from a legitimate multilevel marketing program.

(*) The Federal Trade Commission or the FTC in short, has the regulatory authority over direct selling businesses in the U.S. It sets anti-pyramid standards and determines the business standards to be used by legitimate companies.

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Hakki Ozmorali is the Founder of WDS Consultancy, a management consulting and online publishing firm in Canada, specialized in providing services to direct selling firms. WDS Consultancy is a Supplier Member of the Canada DSA. It is the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.

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 As the below table shows, things did not go well at Amway between the 2013-2018 period. To be more precise, its global sales went down from $11.8 billion in 2013 to $8.6 billion in 2017, a 27%-decline in five years.

Finally, Amway managed to reverse this trend in 2018, by increasing its global sales to $8.8 billion. However, company reported $8.4 billion for 2019, the worst figure in 10 years. In 2019, Amway celebrated its 60^th anniversary.



Looking at Amway’s Growth

Markets:

Amway’s top ten markets, as reported, include China, the U.S., Korea, Japan, Thailand, Taiwan, India, Russia, Malaysia and Hong Kong.

Product Categories:

The nutrition category of vitamins, dietary supplements and weight management products continued to be the top sales category for Amway, representing 54%  of its sales, up 1% from 2018. Beauty and personal care generated 25%, down less than one 1% from last year. Home products account for 20%, and “others” 1%.

Amway’s top-selling nutrition products are Nutrilite All Plant Protein Powder, Nutrilite Double X / Triple X Dietary Supplement, and Nutrilite Vitamin C Plus.

Amway prides itself with having 400 unique products and also with its Nutrilite brand being world’s top-selling vitamins and dietary supplements brand. Over 11 billion Nutrilite vitamin and mineral tablets and soft gels are sold annually, Amway says.

Looking at Amway in Some Numbers

* Operates in more than 100 countries and territories
* Employs over 15,000 employees globally
* Has 500 scientists, engineers and technicians in its 11 R&D departments
* Owns 6 manufacturing plants (3 in the US, 1 in each of China, India and Vietnam)
* Owns and operates nearly 6,000 acres (2,428 hectares) of certified organic farmland
* Holds in excess of 780 patents and has 220 pending patent applications



 Appointment of a CEO

Along with being Amway’s 60^th anniversary, 2019 will also be remembered with the appointment of a “CEO”. Till then, Amway had been managed at the top, by the members of DeVos and Van Andel families. In the beginning of 2019, Amway announced Milind Pant as its Chief Executive Officer. Most recently, Pant was President of Pizza Hut International. In this role, he led 109 countries with more than 9,000 Pizza Hut stores. Prior to joining Pizza Hut, Milind Pant spent 14 years with Unilever in a variety of executive roles.

 2020 and Beyond

Will Amway be able to maintain its leadership position in the global direct sales industry in 2020? Looking at close competitors’ recent performances, I would say, “Most probably.” The gap is too wide to be closed.

 On the other hand, will it be able to come up with a record figure in 2020 to exceed the $11.8 billion of 2013? That’s very unlikely, especially given the situation we are all going through globally.

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This week’s featured article is a brief compilation of industry news of significance from 2019. As you scroll down, I am sure you will agree with me that it was most certainly another exciting year for the industry with all the positives and the negatives.

I have also included articles from The World of Direct Selling that attracted much interest last year.

> Herbalife CEO Richard Goudis Resigns Over Comments He Made Before Taking the Job
> New Avon Names Laurie Ann Goldman CEO
> Stella & Dot to Exit European Market
> China Launches Campaign to Regulate Health Product Market
> Nerium Gets New Name
> Jeunesse Posts Record Year with $1.46B in Annual Sales
> Mary Kay Celebrates 50 Years of an American Icon – the Mary Kay Pink Cadillac
> LuLaRoe Founders Accused of Hiding Millions to Avoid Creditors

Most-Read Article in January on The World of Direct Selling:
What Direct Sellers Can Learn from the Corporate Training Industry (Vince Han)

> Amway Reports Sales of $8.8 Billion USD in 2018
> USANA Posts Another Sales Increase as China’s Direct Selling Clampdown Looms
> Avon Sees Revenues Decrease in Q4, Full Year 2018
> Herbalife Neared $5 billion Mark in 2018; Waits for Other Shoe to Drop in Goudis/China Probe
> Medifast Announces 87% Revenue Increase in Q4 and 66% for the Full Year
> Nu Skin Expands to Peru
> Skin Care Billionaires Rodan and Fields Return to the Teen Acne Market

Most-Read Article in February on The World of Direct Selling:
The 7 Giants’ 2018 Growth Review (Hakki Ozmorali)

> Fact or Fiction? Let’s Set the Record Straight – US DSA President
> Brazil’s Natura and Avon Confirm Deal Talks
> Nature’s Sunshine Reports $365 Million Sales for 2018, Up 7%
> Tupperware Parties: Suburban Women’s Plastic Path to Empowerment
> Two Mary Kay Executives Make Black Enterprise’s 2019 Most Powerful Women List
> Why Direct Sales Appeals to So Many Moms

Most-Read Article in March on The World of Direct Selling:
Common Pitfalls that Prevent Profitability in Direct Selling Start Ups (Dan Murphy)

> DSN Announces the 2019 Global 100
> Young Living Celebrates 25 Years of Global Growth
> Amway Disrupts Its Own Beauty Business, Launching 50 New Mobile Apps
> More Than 100 LuLaRoe Sellers Have Filed for Bankruptcy
> How Blake Mallen Capitalized on the Gig Economy Before It Was a Thing
> Brazilian Cosmetics Giant in ‘Advanced Talks’ with Avon
> Mary Kay Recognized by Forbes as One of America’s Best Midsize Employers 2019

Most-Read Article in April on The World of Direct Selling:
Marketing’s New Role to Keep A Direct Selling Company Relevant (Jonas Hedberg)

> Oriflame’s Co-Founder Jonas af Jochnick Has Suddenly Passed Away
> Nu Skin Named the World’s #1 At-Home Beauty Device System Brand by Euromonitor
> Tupperware Names CEO Tricia Stitzel Chairman of the Board
> AdvoCare Business Changing
> Founding Family Offers to Buy Out Oriflame
> It’s Official: Natura Buys Avon

Most-Read Article in May on The World of Direct Selling:
AdvoCare Abandons MLM: Uncertainty Returns to Direct Selling (Jeff Babener)

> WFDSA Announces Record-setting 2018 Direct Selling Business Results
> LG to Acquire New Avon North America
> US DSA Announces 2019 Awards Winners and Highest Performing Companies
> Natura’s Avon Acquisition Creates the First Latin American Beauty Powerhouse
> Retail Was Never in Our Plan and It Won’t Happen in Future Also: Frederic Widell, Oriflame VP
> Kirsten Dunst Is Making a Show About a Cult-Like MLM Company
> Amway, the Family Business that Became Global (Google-Translated Text)

Most-Read Article in June on The World of Direct Selling:
2019: The Year Direct Selling As We Know It Changed Forever (Brett Duncan)

> Happi Magazine Announces Top 50 Household and Personal Products Companies
> Canada DSA’s Recipients of the 2019 DSA Awards
> Amway Sues Sellers for Trademark Infringement, Faulty Product Distribution
> As India Hicks Closes Her Luxury Label, Is This the End of Tupperware-Party Shopping?
> USANA: China’s 100-Day Crackdown Has Damaged Consumer Confidence; Sales Drop by 15%
> Mary Kay Champions Business Excellence, Ethics and Social Responsibility, Reaps Rewards in Europe
> Nature’s Sunshine Announces New Global Leadership Structure and Appointments
> Pampered Chef Succeeds in Trademark Infringement Battle

Most-Read Article in July on The World of Direct Selling:
Five Ways the Direct Selling Industry Can Achieve Sustained Growth (Ben Gamse)

> New Amway CEO Shares Digital Vision
> doTERRA CIO Todd Thompson: Social Selling Is Taking off
> Executive Changes at Scentsy
> LG Closes $125M Acquisition of New Avon
> Coty and Younique to Part and Focus on the Development of Their Respective Strengths
> US Direct Selling Association CBD Memo: Ingestible CBD-Infused Products Violate DSA Code of Ethics
> “Tupperware-Style” Retail Makes a Comeback with 27% Growth in UK

Most-Read Article in August on The World of Direct Selling:
Why Are They Leaving Our Company? (Hakki Ozmorali)

> DSA Canada Responds to Globe & Mail Article
> Natura Lands in Asia and Starts Operations in Malaysia
> Tracy Britt Cool to Leave Pampered Chef to Start New Venture
> Rodan + Fields to Launch in Japan
> WorldVentures Expands to Brazil
> Nature’s Sunshine Announces Entry into CBD Market
> MONAT Expands into Europe with Its Launch in Ireland and Poland
> Amazon Challenges Amway, Modicare and Oriflame Ruling in Supreme Court

Most-Read Article in September on The World of Direct Selling:
Natura and Avon: Will This Acquisition Work for Both Sides? (Hakki Ozmorali)

> AdvoCare Will Pay $150 Million To Settle FTC Charges
> FTC v. AdvoCare: Enforcement Action Demonstrates Importance of Compliance Programs
> Uber Is Launching a New App That Matches Freelance Workers with Businesses
> Herbalife Announces CEO Succession Plan
> How Mary Kay China Is Trying to Stay Relevant with Younger Beauty consumers
> Beautycounter Appoints COO and CCO
> Origami Owl CEO Chrissy Weems Explores the Roots of a Successful Business
> USANA Announces Appointment Promotion of Walter Noot to Chief Operating Officer
> Oriflame to Focus on Wellness, Position as Healthy Lifestyle Brand: CEO Magnus Brannstrom

Most-Read Article in October on The World of Direct Selling:
FTC vs. AdvoCare: A Teachable Moment for Direct Selling (Jeff Babener)

> Neora Files Suit Challenging FTC’s Attempt to Change Direct Selling Laws
> Herbalife, Younique, LuLaRoe And Other MLMs Suddenly Under Fire
> LuLaRoe: From Startup to Over $1 Billion in Less Than 4 Years. Lessons and Growing Pains
> Tupperware Appoints Chris O’Leary Interim CEO
> U.S. Charges Two Former Herbalife Executives in China over Bribery Scheme
> UK DSA Announces 2019 Star Award Winners
> Jeunesse Enters Global Essential Oils Market

Most-Read Article in November on The World of Direct Selling:
AdvoCare, Neora, an Ever More Aggressive FTC! What Now? (Alan Luce)

> Kyani Founders Identified as Victims in Plane Crash
> Former New Avon CEO: Company Reneged on $1M Severance
> USANA Announces Retirement of Founder and Chairman, Myron W. Wentz
> Why Market America Is a Legitimate and Thriving Business
> US DSA  2019 Sales and Marketing Conference Reveals New Data on Direct Selling and Independent Work
> The 10 Beauty Brands That Defined the 2010s

Most-Read Article in December on The World of Direct Selling:
5 Keys to Communications Confidence in 2020 (Crayton Webb)

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Hakki Ozmorali is the Principal of WDS Consultancy, a management consulting firm in Canada specialized in providing services to direct selling firms. WDS Consultancy is a Supplier Member of the Canada DSA. It is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.

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The post A Year in Review: 2019 in the News appeared first on The World of Direct Selling.

He has lectured and published extensively on direct selling. Jeff is a graduate of the University of Southern California Law School. He is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener
FTC vs. AdvoCare: A Teachable Moment for Direct Selling 

History is Written by the Victor

Ring the bells that still can ring
Forget your perfect offering
There is a crack, a crack in everything 
That’s how the light gets in
– Anthem, Leonard Cohen

Quiet Uncertainty

It was like the calm of quiet uncertainty before the storm. In May, 2019, 26-year-old leading direct selling company, AdvoCare, announced that it would exit MLM in favor of a one level direct sales model. It indicated that it was doing so, and “had no choice,” after confidential talks with the FTC. That was it. No other explanation. And the industry asked: What is this all about? It may be true, as T.S. Elliot said, “the world will end in a whimper, not a bang.” For a detailed article on the May withdrawal and ramifications, see AdvoCare Abandons MLM: Uncertainty Returns to Direct Selling.

A Jarring Dissonance

The FTC Speaks

And then, in October 2019, a cacophony, as the other shoe dropped. The FTC announced a stipulated judgment in which AdvoCare was proclaimed online and in newspapers across the country as a pernicious pyramid scheme that had swindled hundreds of thousands.

The settlement came with a $150m fine, life time MLM bans for AdvoCare’s CEO and top distributors, and the FTC spiked the ball in the end zone, noting at its press conference, “It is significant that we have a large and well known multilevel marketing company that is admitting that it operated as a pyramid… “

Sending an underlined message across the bow of the direct selling industry, the FTC online blog labeled the case as “the landmark settlement.”

Buyer’s Remorse

“Foul!,” called AdvoCare in an immediate responsive press release:

“The FTC incorrectly stated in a press conference that AdvoCare had admitted to operating as a pyramid. This is categorically false. AdvoCare forcefully rebutted this charge in its discussions with the FTC. To this day, AdvoCare denies it operated as a pyramid.”

Actually, AdvoCare was technically right… No such admission had been given (although it had stipulated to the veracity of the factual allegations in the Complaint), prompting the Director of the FTC Bureau of Consumer Protection to later apologize at the Washington, D.C. DSA Legal and Regulatory Conference.

A pyrrhic victory for AdvoCare, whose marketing program and opportunity for thousands of distributors was totally gutted. “Elvis had left the building.”

FTC Has Non-Legal Leverage. What Now?

This was the third major DSA member company hit by the FTC in less than 5 years. And the FTC accomplished its goals, without litigation, but rather the sheer leverage it had over the companies and individuals based on their unique factual situation. For Vemma, an asset freeze. For Herbalife, the overriding need to address its position as a publicly traded company. For AdvoCare, industry speculation about the unstated jeopardy of owners and board members, as well as existential threat to the business. For better or worse, the FTC accomplished its objectives in all three cases without taking the matter to formal adjudication. Therefore, the new quasi legal standards were set by FTC leverage, without firing a litigation shot, rather than by actual case law. Case law did not change.

Serious? To paraphrase a general counsel of one of the industry’s largest MLM companies: “Our first priority is not to prepare for a FTC confrontation, but rather to use our best efforts to stay off their radar in the first place.”

More to come? Could well be. The industry was left with a choice. It could wring its hands or treat this as a teachable moment for its future. As they say, a new reality, and “it is what it is.”

From the industry’s perspective, were the penalties draconian? Absolutely. Might it have been more appropriate to adopt a remedial solution rather than ban the entire MLM model? Absolutely. But that is another issue for another day.

The initial instinct of the industry was to recoil from a near death blow to a 26-year-old industry leader and longtime DSA member, complaining of a new era of FTC bullying. But, as the facts unraveled, some real concerns arise as “the crack in the bell lets the light in.” Maybe, it was not about bullying after all. The industry needs to pay serious attention and self- reflection about guidance it provides to its own companies.

Fact Checking the FTC and AdvoCare

What were the facts in issue from the standpoint of the FTC and AdvoCare? Well, as far as AdvoCare, we will never know. The company capitulated, without even filing one defensive document. And so, all we really can discern is what the FTC alleged. And from a legal standpoint, their version “stands” because, notwithstanding a preamble that states that AdvoCare neither admits nor denies any of the allegations in the Complaint, the stipulated order for permanent injunction and monetary judgment, recites:

VI.(D) The facts alleged in the Complaint will be taken as true, without further proof, in any subsequent civil litigation by or on behalf of the Commission against Settling Defendants…”

And so, we won’t really hear AdvoCare’s explanation. All we have is the uncontested FTC Complaint allegations. And history suggests that this “neither admit nor deny” stipulated order will morph into a “de facto” FTC guidance in the future.

The big picture said the FTC is that the facts support that AdvoCare crossed the line from operating a legitimate MLM program to a program that was instead an illegal pyramid scheme.

For the uncertainty created by no clear adjudication of such important issues, the industry owes “no thanks” to AdvoCare for its decision to merely “roll over,” despite contending after the settlement order that it had forcefully rebutted the pyramid charge in pre-settlement discussions with the FTC. Unfortunately, the “game over buzzer” had already sounded.

History Repeats Itself: Omnitrition Déjà Vu…

Other than ramped up aggressive enforcement and penalties (life time MLM bans for the CEO and lead distributors and forcing AdvoCare to abandon the MLM model), those looking for new insight in the AdvoCare prosecution, will not find it.

This was the opinion of the FTC and its Director of the Bureau of Consumer Protection, Andrew Smith, and a historical legal perspective would come to the same conclusion.

The AdvoCare prosecution can be summed up in a few words:

1. Inventory Loading. In other words, “pay to play,” “buy in to active qualification for “active” rank commissions and rank advancement commissions; purchasing far more product than realistically needed for either personal use or to meet resale demand to customers, focusing on recruiting business builders who buy inventory and encourage others to do the same.

2. Exaggerated Earnings Claims. It is eerie, but this is a “history repeats itself” moment. In 1996, in Webster v. Omnitrition, (79 F.3d 776) the U.S. Court of Appeals for the 9^th Circuit, held Omnitrition to be a pyramid scheme based on the company recruitment of business builders qualified with  inventory loading, who in turn, did the same. Omnitrition was co-founded by Charlie Ragus. In 1993, Ragus founded AdvoCare. It is a sad irony that 26 years later, the Ragus founded AdvoCare MLM program would be shuttered by similar inventory loading accusations as in Omnitrition.

The Omnitrition Court held that the well venerated Amway safeguards meant nothing if not enforced and if, in the presence of inventory loading:

The promise of lucrative rewards for recruiting others tends to induce participants to focus on the recruitment side of the business at the expense of their retail marketing efforts, making it unlikely that meaningful opportunities for retail sales will occur. Koscot, 86 F.T.C. at 1181. The danger of such “recruitment focus” is present in Omnitrition’s program. For example, Webster testified that Omnitrition encouraged him to “get to supervisor as quick as [he] could.” Ligon states:

[T]he product sales are driven by enrolling people. In other words, the people buy exorbitant amounts of products that normally would not be sold in an average market by virtue of the fact that they enroll, get caught up in the process, in the enthusiasm, the words of people like Charlie Ragus, president, by buying exorbitant amounts of products, giving products away and get[ting] involved in their proven plan of success, their marketing plan. It has nothing to do with the normal supply and demand in this world. It has to do with getting people enrolled, enrolling people, getting them on the bandwagon and getting them to sell product…

FN3… First, Omnitrition produced evidence of enforcement only for its ten customer rule. Even assuming that Omnitrition’s enforcement measures are effective, it is not clear that these measures serve to tie the amount of “Royalty Overrides” to retail sales. The overrides are paid based on purchases by supervisors. In order to be a supervisor, one must purchase several thousand dollars’ worth of product each month. That some amount of product was sold by each supervisor to only ten consumers each month does not insure that overrides are being paid as a result of actual retail sales.

Fast Forward 23 years and it all sounds the same. Said the FTC in its Press Release and Blog about AdvoCare:

Press Release:

AdvoCare operated an illegal pyramid scheme that pushed distributors to focus on recruiting new distributors rather than retail sales to customers. The compensation structure also incentivized distributors to purchase large quantities of AdvoCare products to participate in the business and to recruit a downline of other participants with the same incentives. The clear directive of this structure was, as one AdvoCare distributor explained during the company’s Success School training, to “recruit business builders who recruit business builders who recruit business builders…”

The FTC alleged that under the AdvoCare compensation plan, participants were charged $59 to become a distributor, making them eligible to receive discounts on products, and to sell products to the public. To earn all possible forms of compensation, however, participants had to become “advisors,” which typically required them to spend between $1,200 and $2,400 purchasing AdvoCare products and accumulate thousands of dollars of product purchase volume each year, according to the complaint. The FTC alleged that the income of AdvoCare advisors was based on their success at recruiting, with the highest rewards going to those who recruited the most advisors and generated the most purchase volume from their downline.

To recruit people, the FTC alleged, AdvoCare and the other defendants told distributors to make exaggerated claims about how much money average people could make—as much as hundreds of thousands or millions of dollars a year. The FTC alleged that distributors were told to create emotional narratives in which they struggled financially before they joined AdvoCare, but obtained financial success through AdvoCare. Distributors were also allegedly told to instill fears in potential recruits that they would suffer from regrets later if they declined to invest in AdvoCare.

The FTC alleged that the defendants told consumers that they could realize large incomes by promoting AdvoCare and that their earning capacity was limited only by their effort. For example, AdvoCare promoter Diane McDaniel told consumers that “the sky is the limit. I’m the variable. I get to decide what I truly want according to the effort I put forth” and that “there is incredible profit that can be made through infinity.”

In reality, the FTC alleged, AdvoCare did not offer consumers a viable path to financial freedom. In 2016, 72.3 percent of distributors did not earn any compensation from AdvoCare; another 18 percent earned between one cent and $250; and another 6 percent earned between $250 and $1,000. The annual earnings distribution was nearly identical for 2012 through 2015.

FTC Blog:

… people paid AdvoCare thousands of dollars to become “distributors,” buy inventory, and become eligible for cash bonuses and other rewards. But, the FTC says, AdvoCare rewarded distributors not for selling product but for recruiting other distributors to spend large sums of money pursuing the business opportunity. That push to recruit is a classic sign of a pyramid scheme.

On the earnings front, the FTC also alleged that AdvoCare earnings disclosures played fast and loose with earnings averages by extrapolating data of one month’s earnings into an annual earnings average, when in fact, the month chosen might not be a recurring event.

Legal observers are perplexed how it could happen after Omnitrition litigation that the same “front loading” fact pattern might occur again in a related successor company. Probably, the answer is that, unless one is extremely careful, these things just “creep up on you.

Unfortunately, the cultural problem was not new and was a bit of a “tiger by the tail.” The focus on recruiting and duplicating “front loading” business builders was suggested by a legal expert, who was also a former insider knowledgeable observer, to predate the FTC Order by more than a dozen years:

AdvoCare leaders encouraged new distributors to “buy their Advisor order” ($2,000) so they could begin earning commissions sooner. This was ingrained in the distributor culture… there were efforts made to discourage this and ensure that products purchased through “advisor orders” were sold to retail customers. …AdvoCare was a victim of its own success and it was unable to reign in leaders… Existing problems only become magnified when you go through a period of hyper-growth similar to what AdvoCare experienced.

Based on the “uncontested” alleged facts set forth by the FTC, serious pyramiding issues are raised. And that is all we have. Without a vigorous defense by AdvoCare, or, in fact, any defense at all, and based on the FTC Settlement Order providing that “facts alleged will be deemed to be true,” it is far more than a challenge for industry supporters to come to the support of AdvoCare in this dispute. This is a true loss for the direct selling industry. The silence of AdvoCare left the industry in an awkward uninformed position with no arrows in its quiver, akin to a performer on stage pleading, “Throw me a bone, I’m dying up here.”

State of the Law

The FTC and the direct selling Industry are totally in sync on one point:

Nothing about the FTC/AdvoCare settlement changes the existing legal standards for pyramid vs. legitimate direct selling. Those case law standards weave their way in FTC cases from the Koscot case through Amway through Burnlounge:

Koscot: Multilevel commissions must be based on sales to ultimate users.

Amway: Multilevel companies must adopt procedures that encourage retail selling.

Omnitrition: (9^th Circuit Class Action): In the presence of front-loading and lack of enforcement of the Amway standards, companies can expect pyramid challenges.

Burnlounge: The primary incentive to distributor purchases or payments should be a genuine need, whether for resale or personal use, as opposed to qualification in the compensation plan. Are distributor payments and commissions driven by recruitment and qualification in the plan, on the one hand, or sales to ultimate users?

Andrew Smith, FTC Director of the Bureau of Consumer Protection, was in total agreement, in his presentation to the October, 2019 Washington D.C. DSA Legal and Regulatory Conference.

In a well-received presentation, and to the surprise of many attendees, he emphasized multiple times that the FTC is supportive of the MLM model. He went out of his way to express his opinion that, in some ways, MLM is a superior business model because:

1. It provides flexibility and opportunity to individuals to earn extra income.

2. It provides a warm and attentive experience, and qualify products, to retail consumers.

He stated that the FTC welcomes compliant MLM companies. And his standards were not measurably different than existing case law.

The FTC seems to have retreated from its all-out assault on recognition of personal use, as argued and rejected by the BurnLounge court. Its attention is now turned to the basic question of whether a MLM program is placing its focus on sales to ultimate users, which includes personal use purchases in reasonable amounts and wholesale purchases for resale, in amounts reasonably calculated to fulfill retail consumer demand and for which the company can track the flow of product to ultimate users such that compensation reasonable relates to sales to ultimate users. (As an aside, the Director played slightly “fast and loose” in describing the Koscot test as paying compensation “unrelated to product sales,” omitting three key words of Koscot, “to ultimate users,” thus leaving the erroneous impression that only product sales to non-participant retail customers should count. Such a position would be a misrepresentation by omission of the Koscot/BurnLounge standard.

But overall, Director Smith’s description of the state of the law seemed consistent with case law. He suggested this analysis:

1. Does the scheme emphasize recruiting over sales to consumers? Are compensation results driven by recruiting others? Are distributors focused on recruitment and duplication rewards arising from recruiting other distributors to “buy?” Does that plan have a qualifier relating to recruitment?

2. Does the program have incentives to buy goods that are not based on satisfying a distributor’s own personal needs or reasonable inventory to supply retail customers? A telltale pattern would be monthly purchases just enough to meet compensation qualification activity requirements. Another would be front-loading which Director Smith indicated as an attribute of pyramid schemes. His observation of AdvoCare was that distributors were encouraged to buy and did buy for more than they reasonably needed or could use.

 He stated that the FTC key questions are:

1. How do distributors really make money in the plan?

2. Does the company have incentives that promote recruiting and purchasing over sales?

3. Is the company gathering data to track product sales to end consumers?

Director Smith stressed:

1. At the FTC, we want you to be successful as a MLM.

2. However, we also want you to be in compliance as an MLM.

3. Effectively, he said, “we are not looking for a fight, and we want you to stay off our radar,” and he implored companies to examine and reexamine their programs to remove any practices that would put a company on the FTC radar.

4. He stated the FTC position, which no one in the industry disputes, is that a pyramid headhunting inventory loading recruitment scheme is unsustainable as a business model.

Unless completely cynical, given the tenor of his presentation, it seems fair to take Director Smith at his word. Refreshing! The industry can live with this going forward.

Guidance for Radar Avoidance in a Post-AdvoCare World

Every breath you take
Every move you make…
I’ll be watching you
– Every Breath You Take, Sting, The Police

If you are looking for life in a post-FTC vs. AdvoCare/Herbalife/Vemma world, here are some common sense guidelines to create the strongest defense to your MLM program and for promoting anti-pyramid practices aimed at staying off the FTC radar:

1. Overriding Goal… The Big Picture.

The compliant MLM “acid test” will be a mandate and demonstration of significant sales to non-participant retail customers. Bottom line analysis by FTC and state AGs:

A product or service with real retail customers and a good ratio of retail customers to distributors to demonstrate that people buy the product because they want it, and not just to qualify in the marketing plan.

Upline commissions must derive from sale of product to ultimate end users.

With a high retail customer to distributor ratio, experience suggests that most other legal issues (assuming no outrageous earnings or product claims) tend to recede into the background.

2. Track. Track… Flow of Product to and Use by the Ultimate User.

After Vemma, Herbalife and AdvoCare, few priorities are as important as tracking and verifying the flow of product to and use by the ultimate user, whether it be a nonparticipant retail customer or distributor for personal/family use. The short answer: Track the flow and use of product to both nonparticipant retail customers and distributor personal/family use. In fact every company and the DSA should launch a joint initiative with leading direct selling software companies to develop software which accurately tracks the flow of product such that a company can demonstrate that distributor purchases are, in fact, in reasonable amounts for distributor personal use and reasonable inventory quantities for resale, calculated to meet the ordering needs of retail customers. And software should track that every product sold is used by the ultimate user, whether for personal use by distributors or use by non-participant retail customers.

3. Promote Non-Participant Retail Sales and a Preferred Customer Program.

It is in everyone’s interest, the company, distributors, the industry and regulators, to place an emphasis on retail sales to non-participant customers. After all, the business is called “direct selling,” and not “direct consumption.” The promotion of retailing should find a thread through every piece of company literature and advertising.

In addition the gold standard of retailing is the presence of non-participant preferred customers, i.e., those retail customers that are provided incentives and discounts to commit to monthly or orderly product purchases. From a legal standpoint, a robust preferred customer program makes the statement that there is a real market for the product and purchasers are purchasing because they want the product as opposed to being motivated by qualifying in the business opportunity.

4. Time to Rethink Personal/Group Volume Qualification Requirements for Active Status, Rank Status, Rank Advancement Commission Payout if the Volume is Based on Distributor Purchases that are Not Clearly Documented as End User Personal Use of Distributors or Retail Customers.

In fact, some leading direct selling companies have already initiated elimination of volume requirements for active status, fast start commissions, rank status, rank advancement and payment of enhanced commissions. The FTC has long expressed a deep concern for volume requirements that tend to trigger inventory loading or distributor purchases that are not driven by consumer demand, but instead for purposes of qualification.

Said Former FTC Commissioner Edith Ramirez in her remarks at the DSA Business and Policy Conference in September, 2016: “Any requirements or incentives that participants purchase product for reasons other than satisfying genuine consumer demand – such as to join the business opportunity, maintain or advance their status, or qualify for compensation payments—are problematic.”

In Vemma and Herbalife, companies were restricted on credit that could be accorded to distributor purchases, whether for personal use or resale. Many companies are reconsidering volume requirements that are documented as reasonable personal use or retail sales. Unless a company is prepared to track end destination of product, it should reconsider volume requirements that cause suspicion that the products are purchased to qualify and not driven by consumer need.

Above all, rewards should reasonably relate to sales to end users (personal use plus retail customers.

There are multiple approaches to compensation for multilevel payments on downline purchases.

(a)      The Herbalife settlement limited credit to downline distributor purchases (only about one-third of distributor purchases qualified for credit for MLM commissions.)

(b)      Pay MLM commissions only after verification of personal use or sale.

(c)      Pay MLM commissions at time of purchase, but absolutely track and verify personal use and sale of product purchased for resale.

5. Rethink Distributor Ordering Methods that Produce “Inventory Loading” Accusations. Use a Ramp-Up Authorization Approach that Authorizes Increasing Wholesale Orders Based on Demonstration of Retail Sales.

Above all: Do not allow distributors to purchase more than they can use for reasonable personal use and/or quantities for there is a realistic resale to retail consumer need.

Actually, in today’s world of next day UPS and FedEx, online ordering and direct to consumer shipping, there really is no need any more for large inventory purchases or stocking distributors.

Approaches for Avoiding Inventory Loading:

(a)      Eliminate or reduce volume requirements for active, rank, rank advancement.

(b)      Allow volume, but track and pay only on personal use level of volume or wholesale for resale volume that is verified sold to retail customers.

(c)      Limit amount of inventory or, at least, install a ramp-up authorization based on demonstrated sale and/or personal use.

6. Bulletproof Yourself on Earnings Claims. Don’t be the Nail that Sticks Up and Gets Hammered Down.

Avoid earnings hype in advertising, testimonials and lifestyle presentations. Scuttle the Maserati and the Tuscan villa images. Be realistic… this is the anomaly and not the norm. Take the bullseye off your forehead. In almost every FTC case, the first invitation to regulators is unrealistic earnings claims. The hype “opens” the door or lifts the canopy of the tent. And, as they say, “Once the camel has his nose in the tent, you can be assured that his ‘body’ will soon follow.”

In other words, don’t be the low-lying fruit. Don’t effectively, and unintentionally, “bait” the FTC to initiate an enforcement action by over-aggressive hype and promises.

Absolutely do not make claims of wealth, fast wealth, easy money or sure-fire systems, nor effectively invite the FTC to inquire into a program based on earnings hype and systems based on distributor “purchasing” rather than distributor “selling” and “using.”

And whether legal or not, now is the time to “ditch” the pictures and videos of distributor mansions and luxury cars. Since such MLM-driven lifestyles are clearly the exception to the rule, why wear a red flag in front of a “bull.”

7. Post a Transparent Earnings Disclosure.

As a general matter, the FTC is all about disclosure so that consumers can make informed decisions. Once you have a track record, post a simple and transparent average earnings disclosure. At a minimum, you should disclose:

(a)      What percentage of distributors who have signed up are active, i.e., earning any income?

(b)      Of those that are active, what is the average earnings?

(c)      If any example, testimonial or illustration of a particular income, bonus or lifestyle award is presented, what percentage of active distributors earn at least that amount or above?

(d)      Unless the company surveys average costs of doing business by distributors, earnings averages should be represented as “gross earnings” and that they are not “net earnings.”

(e)      Absolutely disclaim that any earnings illustrations are representations of an expectation of earnings.

(f)       “Pepper” promotional material with average earnings disclosures and disclaimers at every instance that an illustration/testimonial of earnings potential is
provided.

(g)      Either calculate average business costs to disclose net earnings or specifically disclose that average earnings are presented as “gross,” as opposed to “net” and do not take into account distributor business costs.

Irrespective of the depth of the earnings disclosure, do not ever play fast and loose with earnings disclosures, nor “parse” to exaggerate the opportunity.

During his presentation to the DSA Legal and Regulatory Conference, FTC Director raised a new “ask” by the FTC. He suggested that companies should not only present gross earnings, but should also present net earnings which take into account costs of doing business by distributors. Upon questioning, he recognized that this may be a daunting task. At the very least, he suggested that companies should disclose that their typical average earnings disclosures are “gross earnings” and, not net earnings, i.e., they do not take into account distributor costs of doing business. Look for more of this “ask” in the future.

8. Adopt, Follow and Enforce the Amway Safeguards.

The Amway safeguards have been the gold standard and been honored in case after case going on 40 years. Although the FTC may wish to pivot away from the Amway safeguards, the courts have not done so.

(a)      70% rule to avoid inventory loading… no ordering unless 70% of previous orders have been sold or used for personal/family use. Place lids on initial orders and allow a ramp up of size of order over time. Never mandate monthly autoship to qualify for commissions. And avoid front-loading. In the famous Omnitrition case, the court noted that the Amway safeguards are rendered ineffectual as a defense to pyramiding if a company encourages or allows front-loading of product because it becomes clear that commissions are not related to sales to ultimate users when distributors are incentivized to buy huge amounts of inventory that are out of proportion to needs for resale or the needs of personal and family use.

(b)      Adopt and enforce an actual nonparticipant retail sales mandate to qualify to receive commissions. Over the years, that number has been expressed in numbers from five to ten or in sales volume … often with an allowable ramp up over time.

(c)      Honor a buyback policy on inventory and sales support materials for terminating distributors… no less than 90% for 12 months.

9. Consider a Reclassification Program to Convert Non-Earning Distributors to Preferred Customers.

In a new FTC enforcement era, the “name of the game” is demonstrating high ratios of non-participant retail customers to active distributors. In the retailing analysis, non-participant retail customers, who are provided discounts or other incentives in exchange for signing up as “preferred customers,” are like “gold” in “upping” the ratios. Watch for direct selling companies to use major initiatives to convert to preferred customers distributors who are loyal product purchasers, but who are not really “working the opportunity,” i.e., low or no earning in the direct selling opportunity.

The conversion can be voluntary or non-voluntary.

1. Voluntary.

For instance, in the Herbalife settlement, Herbalife was given nine months to work on a reclassification of brand loyal, but low earning distributors, to preferred customers so that the non-participant retailing ratios would be increased for personal use purchases. Other leading companies, such as USANA, followed suit, substantially increasing retailing ratios.

2. Involuntary.

Another path that companies may wish to consider is automatic involuntary conversion. Under this approach a company would adopt an automatic reclassification program that automatically reclassifies non-earning independent representatives to preferred retail customers, all the while providing superb discount pricing, special customer benefits, generous customer appreciation referral rewards. If the converted preferred customer later decides to reactivate, the company might even consider providing an option for the right, after a waiting period or based on customer referral activity, to re-sign up as an active independent representative in a reserved genealogical downline position.

10. Promote Industry Guidance on Compliant Compensation Plans.

Similar to the DSA initiative on earnings claims compliance of the Direct Selling Self-Regulatory Council (DSSRC), support the launch of a DSA task force to develop best practices compensation plan guidelines and to continuously audit and constructively advise member DSA companies for avoiding pyramiding accusations of the sort raised by the FTC in Vemma, Herbalife and AdvoCare.

11. Support Clear Federal Legislation on Direct Selling.

Companies should actively support DSA federal legislative action to set forth clear anti-pyramiding guidelines so that the FTC, states and companies are playing on the same field with the same rules and goalpost settings.

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Once again, the article will focus on these companies’ revenue growth performances.

AVON

Following many quarters with disappointing sale figures, Avon started the year with a 5% revenue increase achieving $1.4 million worldwide sales.

Yet, company’s new CEO Jan Zijderveld was not happy. He said, “Avon’s first-quarter results were unsatisfactory and do not represent the underlying potential of the business.”

In fact, out of four regions, only EMEA came up with a meaningful sales increase (12%). EMEA is Avon’s largest region, generating more than 40% of its global volume. North Latin America was up 1% in the first quarter, South Latin America was at par (0%), and Asia Pacific reported 2% decline.

When it comes to the active representatives on the field, the situation was even worse as all four regions reported decreases: Asia Pacific and EMEA each -1%, and North and South Latin America each -6%, bringing the global figure to -4% as compared to Q1 of 2017.

CEO Zijderveld summarizes what they should do in Avon as: “To win in this market, we must significantly step up our competitiveness. It is important to be agile and quickly identify, understand emerging trends and capture those opportunities faster. This means Avon must start driving bigger on-trend innovations and platforms, and bring them to market much faster with greater scale and impact. For this, we need to become more glo-cal, this means global and local. A few big global innovations with scale and impact, while at the same time capturing opportunities through locally relevant innovations with speed and agility.”

Following the first quarter, Avon announced it had sold its business unit in Japan to LG Household and Health Care for approximately $96.5 million.

For more on Avon’s first quarter results, please click here and here.

HERBALIFE

Herbalife closed the first quarter with a solid 7% increase in its global sales. Company’s Q1 revenue was $1.2 billion this time.

Just like it was Avon’s, EMEA was also Herbalife’s star region during the last quarter. Revenue increase was over 18% in EMEA. Sales grew in Asia-Pacific by 12%, in Mexico by 9%, in South & Central America by 3%, and in North America by 1%. The only decline came from China (-2%). Management stressed the importance of the newly launched products in getting these results. Herbalife reported it had introduced over 60 products in this last quarter globally.

CEO Rich Goudis was more than satisfied with his company’s performance. “In the first quarter, we exceeded expectations as we return to growth in the U.S. ahead of schedule and, as such, we raised our financial outlook for the year. This is an exciting time for the company,” he commented during the investors’ call.

So, Herbalife management was even more optimistic following these results, stating their second quarter sales increase target as 8.5%-12.5%. Herbalife’s full year target for 2018 is 9.0%-13.0% over last year. If achieved, Herbalife will have between $4.8 billion to $5 billion revenue by the end of this year.

A few weeks ago in April, the company announced its strategic name change from “Herbalife” to “Herbalife Nutrition”. Rich Goudis explained the reasoning behind this move, “Our new name, Herbalife Nutrition, reflects our strategic transformation as a leader in the nutrition industry.”

For more on Herbalife’s first quarter results, please click here and here.

NATURA

Brazil’s Natura described its first quarter performance as “another solid growth in sales and profitability across the group”. In fact, Natura’s net revenue increase during Q1 was 56% versus prior year’s same period, reaching R$2.7 billion (approximately, US$750 million). This included three months of additional revenue from The Body Shop.

The group’s main line, Natura’s quarterly growth was 7% over prior-year. Its Brazil unit grew by 1% and its LATAM division by 23%. Natura has over 1 million consultants on the field.

The group has recently been re-branded itself as Natura & Co. Currently, Natura accounts for 62% of the group’s net revenue, The Body Shop for 30%, and Aesop for 8%.

For more on Natura’s first quarter results, please click here.

NU SKIN

Nu Skin achieved an impressive 23% sales growth in the first quarter and all of Nu Skin’s regions contributed to this. The highest percentage growths came from China and EMEA (both 32%). Americas/Pacific region’s contribution was 29%. China is Nu Skin’s largest market that accounts for about 1/3 of Nu Skin’s global revenue.

After having reached $616 million sales in Q1, CEO Rich Wood said, “Our revenue growth was driven by an 11 percent increase in customers and a 16 percent improvement in the number of sales leaders. We are encouraged by the early execution of our growth strategy centered on engaging platforms, enabling products and empowering programs.”

During the earnings call following the first quarter, Nu Skin management explained their growth strategy that had focused on three key pillars: Platforms, Products, and Programs.

For the second quarter, Nu Skin expects $630 to $650 million sales. This is 15% to 18% growth over prior year. And Nu Skin announced its 2018 revenue guidance as $2.51 billion to $2.56 billion, that is 10%-12% yearly growth.

For more on Nu Skin’s first quarter results, please click here and here.

ORIFLAME

Oriflame reported disappointing growth results this time. Its €330.8 million quarterly sales meant a 2.6% decline. Without the one-time impact of the new reporting standards the company announced it had started implementing, the decrease would still have been 2%.

In the first quarter, only one region recorded sales growth and that was Oriflame’s largest region, Asia&Turkey (9%). The rest reported declining sales: CIS (-17%), Latin America (-4%), and Europe&Africa (-2%). Once a very important region for Oriflame, CIS (i.e. Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Mongolia, Russia, Ukraine) seems to continue being a problem.

Oriflame’s active global sales force grew by 1% and reached 3.034 million. However, Oriflame owed this global growth only to the performance in Asia&Turkey, the active sales force declined in its all other regions.

Oriflame’s unit sales dropped by 6% and sales per active by 4% during the last quarter. From the category perspective, the management was especially happy with the performances of skin care and wellness as both achieved double digit sales growth during the quarter.

For more on Oriflame’s first quarter results, please click here.

TUPPERWARE

Tupperware joined Oriflame in the first quarter to report a sales decline: -2.2% with $543 million revenue. Its total sales force of 3.1 million was also down 2%.

At the country level, the most significant positive contribution to the first quarter results in local currency was in China, the management said. This was along with good results in Argentina, CIS, Fuller Mexico, Malaysia/Singapore, Tupperware Mexico and Tupperware South Africa. The local currency sales decreases were most significant in France, Germany and Italy, partially offset by the United States and Canada. Tupperware United States and Canada’s sales were up 9%.

During the earnings call, CEO Rick Goings commented on the results, “As you’ve seen in the first quarter it was a disappointment, down 2% in dollars, while local currency sales decreased 6%, which was below the low-end of our January guidance range of 3 points.”

Patricia Stitzel takes over as CEO so this was Rick Going’s last earnings call participating in as Tupperware’s chief executive. He said on this, “In the direct selling industry, there have been numerous horror stories regarding new leadership taking over a company with no industry knowledge. That continues to this day. And I’ve got to say that’s not the case here.”

Management expects -2% to 0% growth for the second quarter, and -1% to 1% for the whole year of 2018.

For more on Tupperware’s first quarter results, please click here and here.

USANA

With a global revenue of $292 million, USANA grew by 14% in the first quarter. The company’s total number of actives also increased 1.9% year-over-year to 585,000.

USANA’s North Asia region reported 40% sales increase, Greater China 20%, and  Southeast Asia Pacific 12%. Sales in Americas and Europe decreased by 1%.

More than half of USANA’s global business is being generated in China where it has been voluntarily conducting an internal investigation of its China operations, BabyCare Ltd as announced in February 2017. The investigation focuses on compliance with the Foreign Corrupt Practices Act and also certain conduct and policies like expense reimbursement policies. The company said it could not predict the duration, scope, or result of this investigation.

“We are off to a solid start to the year as we continue to see strong momentum in most of our regions around the world,” said Kevin Guest, USANA’s CEO.

USANA plans to open four new European markets, Germany, Spain, Italy and Romania in June this year. In preparation for this, company said it had already made products available on a not for resale basis in these markets.

After the results in the first three months, management announced its 2018 net sales target as $1.13 and $1.17 billion (previously between $1.11 and $1.16 billion).

For more on USANA’s first quarter results, please click here and here.

This concludes are brief analysis of a group of seven public direct sellers. We will wait and see how their results will evolve in the rest of 2018.

…..

Hakki Ozmorali is the Principal of WDS Consultancy, a management consulting firm in Canada specialized in providing services to direct selling firms. WDS Consultancy is a proud Supplier Member of the Canada DSA. It is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.
 
 

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This most recent survey was conducted in 44 countries, with face-to-face and telephone interviews covering 49,000 men and women aged 14-99. The survey’s fieldwork was completed by GfK Germany.

Some of the key findings from this survey are:

Environment for Starting and Running a Business Is Not Satisfactory 

Of the nearly 50,000 people surveyed, 52% say the technology that makes entrepreneurship easier is not available to them. 60% are not happy with education system to teach them the necessary skills, and 66% say their country does not provide rules and regulations that are easy to understand and follow.

North Americans seem to be the most content in this respect whereas those in the EU and Latin America the least happy.



Help in Raising Money Is Needed the Most When Starting a Business 

Raising money for the business idea is found as the most helpful support by 23%. Money is the biggest problem in Asia (28%), and the least in North America (21%).

20% need help with dealing with finances, taxes and regulations, and 18% with identifying customers and marketing the products.

The Ideal Business Is the One That Allows Serving Customers Personally

75% imagine their ideal business where they will serve their customers personally (vs. digitally), 64% to be located in a metropolitan area (vs. countryside), 60% to be profit-oriented (vs. social-oriented), 57% where they will also hire other people (vs. working alone), and 54% to be selling services (vs. products).

“Personal service” is the highest in North America (78%), and the lowest in Asia (65%).



AESI (Amway Entrepreneurial Spirit Index) Further Declines

Introduced in 2015, the AESI measures three dimensions that impact a person’s intention to start a business: desirability, feasibility and stability against social pressure. These dimensions have equal weights on the overall index.

In this last survey, this average score was found as 47%, down 3 points from previous year. Actually, this score last year (50%) had also declined from 2015 (51%).

The scores of each of the three factors measured in the most recent survey were:

• Stability (My family or friends could never dissuade me from starting a business): 50%
• Desire (I consider starting a business as a desirable career opportunity for myself): 49%
• Feasibility (I possess the necessary skills and resources for starting a business): 43%

AESI is found the highest in Vietnam at a level (84%) much higher than the global average. Vietnam is followed by two other countries in Asia: India 81% and China 80%.

AESI is the lowest in Ukraine (21%). Then come Bulgaria (22%) and Japan (25%).

Please click here to read the full report.

…..

Hakki Ozmorali is the Principal of WDS Consultancy, a management consulting firm in Canada specialized in providing services to direct selling firms. WDS Consultancy is a proud Supplier Member of the Canada DSA. It is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.

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Jeff is a graduate of the University of Southern California Law School. He is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener
FTC and Direct Selling Come to the Table as Stakeholders: H.R. 3409

Everything dies baby, that’s a fact.
But maybe everything that dies someday comes back.
Bruce Springsteen, Atlantic City

What a difference a year makes. In a well-received presentation to the November 2017 DSA Regulatory Conference, FTC Acting Chairperson, Maureen Ohlhausen, struck a totally different tone in regard to forward looking FTC enforcement policy on direct selling, contrasted with the October 2016 presentation of former FTC Chairperson, Edith Ramirez.

The Contrasting Messages:

2016: Ramirez: We are the regulator, new rules to live by, just live with it, it’s our way or the highway…

2017: Ohlhausen: We are all in this together… We are all stakeholders… Let’s work together for the benefit of both, fostering the success of an entrepreneurial and small business direct selling industry, and protecting the security of consumers.

Came floating on a lemon leaf
Flying in on a jasmine wind
The Band’s Visit, Broadway Show, 2017

What happened? Why the rapprochement? Why the goodwill? Will it take hold? Well, it’s a guess, but there are many factors:

(1)       The former chairperson “termed out.”

(2)       A presidential election swept in with an anti-regulatory, pro-growth, pro-entrepreneurial and small business message.

(3)       The going forward composition of the FTC Commission will be Republican and more likely to be sensitive to the concerns of the “regulated.”

(4)       Importantly, the previous FTC aggressive position pushed the industry to seek certainty in their business that could only be achieved by federal anti-pyramid legislation firmly rooted in long standing case authority rather than arbitrary administrative enforcement, i.e., the bi-partisan H.R. 3409 Anti-Pyramid bill was introduced and gaining momentum.

(5)       Finally, the FTC may have realized that it had been heavy handed in recently announced enforcement positions.

Point/Counter-Point: Contrasting Punch Lists

It is worthwhile to contrast the “punch lists” of presentations and positions by the 2016 Ramirez and the 2017 Ohlhausen:

Former Chairperson Ramirez’s presentation followed the successful FTC prosecution of FTC v. Vemma and the overly rigid terms of the FTC vs. Herbalife settlement. Although very well-articulated, the presentation warned of potential future FTC guidance that was not rooted in 50 years of case authority, but rather in the newly adopted positions of the Chairperson and FTC staff… an enforcement policy that that would require a complete overhaul of the model of many leading direct selling companies:

(1)       She renounced use of the famous Amway Safeguards Standard, adopted in the landmark FTC case, In re Amway, 1979 as being irrelevant, overrated and not really relied on by courts in pyramid cases. (an unfortunate misinterpretation of case law).

(2)       She redefined the famous Koscot Standard to require compensation to upline to be based on sales to  nonparticipant retail customers rather than based upon Koscot’s language—ie., commissions must be based on sales to “ultimate users”, effectively reclassifying distributor users as “second class” “ultimate users.”

(3)       She pivoted away from a legal analysis in the most recent BurnLounge case, which demanded, in pyramid cases, a factual analysis of the “primary motivation” test in which a court asks “what is the primary motivation for distributors when they make purchases”… instead migrating to a punch list of inflexible operating restrictions imposed on Herbalife in its recent settlement.

(4)       She essentially attempted to create a new legal standard, the “percentages test”, an arbitrary new rule in which upline distributors would be limited to receive commission credit for only one-third of sales volume attributed to personal use by downline distributors, whether or not such purchases were reasonable in quantity and for actual use by the distributor “ultimate user.”

(5)       She announced that a long time practice of almost all leading direct selling companies, autoship to distributors, should, effectively, be prohibited.

(6)       She pivoted away from a well-established component of leading direct selling programs, stating that monthly activity volume requirements may not include any purchases by distributors.

(7)       She asserted that the long time practice of established direct selling companies, tracking of performance activity, connected to wholesale purchasing, should be banned.

Acting Chairperson Ohlhausen, on the other hand took the train in a totally different direction, rooting a going forward FTC policy on long established case authority and principles of government/industry collaboration rather than top down directives.

As acting chairperson of the FTC, Chairperson Olhausen underscored her goals for the direct selling industry… Gone were threats to upend long standing direct selling models:

(1)       One of her overriding goals, she said, “was to increase the FTC’s support of small business and entrepreneurs.”

(2)       She noted: “I recognize that at the heart of the direct selling model are entrepreneurs—those men and women who are out there innovating, taking risks, and trying to generate value.”

(3)       She stressed that the direct selling model offers “a lot” to entrepreneurs:

* Low startup costs;

* Administrative and logistical support from their companies;

* Promotion of efficiencies in the marketplace for friends and families and consumers;

* Varied and diverse products and services;

* Innovations in selling using internet and social media and technology.

(4)       She pointed out the importance of flexibility in regulation by the FTC and that it is important that the FTC stay away from rigid application of “one size fits all” regulatory enforcement, looking instead on “our case-by-case” enforcement process of “specific harm” in that particular case.

(5)       Consistent with the views of leading companies in the direct selling industry, she applauded industry self-regulation with government oversight as a backup, while at the same time emphasizing that government enforcement powers should be “robust and judicious.” Why judicious? Said Ohlhausen, “Over-zealous government involvement can diminish industry members’ participation in the self-regulatory system, which reduces the system’s effectiveness. Businesses that believe government action is inevitable will not participate or invest in self-regulation.”  How true, and what a great prelude to cooperation between the FTC and the direct selling industry.

(6)       Chairperson Ohlhausen took the time to lay out several “bright line” markers intended to serve as FTC’s down payment on a cooperative relationship with direct selling:

* “The FTC and the DSA have a good working relationship, and for that, I thank you. We’ll continue to cultivate that relationship…”

* The FTC took special care to understand the dynamics of direct selling, and exempted multilevel marketing programs from its recently updated Business Opportunity Rule.

* Pivoting from Chairperson Ramirez’s comments that the Herbalife settlement terms may be the basis of future FTC guidance or rules, Chairperson Ohlhausen stated unequivocally that settlements and orders do not apply to the entire industry: “The answer to that question is ‘No’. Orders arising from FTC settlements are binding only on the entities and individuals identified in the order. The orders may of course, provide industry participants with additional data points on, for example, business structures that the FTC believes comply with the law. But that’s not to say the structures outlined in those orders are the only way the FTC believes companies can comply.”*

* Does the FTC assume or believe that every multi-level company is a pyramid scheme? Responded Ohlhausen, “The answer to that question is also ‘No’… We recognize the direct selling model has a lot to offer the marketplace and consumers.”

* After hearing from Chairperson Ramirez in 2016, what the industry heard, or inferred, was that the FTC was abandoning longstanding case authority for its own “punch list” of what does or does not fit within legitimate multilevel marketing vs. pyramid scheme. Not so fast, declared Chairperson Ohlhausen, i.e., the FTC is going back to basics… a refreshing comment from the industry’s perspective and one that is the driving force behind H.R. 3409. Said the Chairperson, “At the risk of getting into too much legalese, the FTC described an unlawful pyramid scheme in our case against Koscot Interplanetary, Inc. back in 1975. Most courts have adopted that description and it’s the description we have used in our recent cases. (Author’s comment: many industry observers might take exception to the observation that this approach has been the guiding FTC enforcement position in recent cases.) Under that description, unlawful multi-level marketing structures are “characterized by the payment of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive, in return for recruiting participants into the program, rewards which are unrelated to the sale of the product to ultimate users.” (emphasis added)” Citing, In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1180 (1975).

* And realizing that “there are a lot of nuances” packed in the Koscot Standard and analysis of legitimacy vs. pyramid, Chairperson Ohlhausen, importantly, noted, “I have instructed the FTC staff to meet with the various stakeholders, including the DSA, to discuss those nuances. We anticipate applying the information we’ve gained to issue future guidance, as well as to guide future law enforcement decisions.”

H.R. 3409: An Opportunity for both the FTC and the Direct Selling Industry

And now… an opportunity for the FTC and direct selling Industry to work together for certainty that they both deserve. A bi-partisan bill, H.R. 3409, the Anti-Pyramid Promotional Scheme Act of 2017.

The stated purpose of H.R. 3409: To amend the Federal Trade Commission Act to prohibit pyramid promotional schemes and to ensure that compensation is not based upon recruitment of participants into a plan or operation, but on sales to individuals who use and consume the products or services sold, and for other purposes.

It is the first of its kind at the federal level. Interestingly, anti-pyramid statutes have been enacted in almost all states for half a century. And, anti-pyramid laws, similar to the current federal bill, have been adopted in more than 20 states, with almost identical legislation adopted in more than a dozen states.

H.R. 3409 is the “real thing” and it slams abusive pyramid scams. The core of the legislation, is rooted in a 50 year line of cases that emanate from that case, Koscot, that Chairperson Ohlhausen describes as the backbone of “going forward” FTC policy, a rule that commissions paid to distributors must be based on sales to “ultimate users.” Bottom line: the bill would finally give the industry certainty that is found in the line of cases from Koscot to Amway to BurnLounge that “ultimate users” include non-participant customers as well as participants who purchase in reasonable amounts for actual personal or family use. Language in the bill lines up perfectly with the established standard of the Koscot case.

Point by point, H.R. 3409 satisfies the goals of both the case law, Chairperson Ohlhausen’s reliance upon Koscot and industry standards that have been adopted long since in so many states. The bill:

(1)       Condemns inventory loading;

(2)       Calls out as “evil” pyramid headhunting recruitment schemes;

(3)       Per the Koscot case, forbids payment of commissions or rewards that are unrelated or not based on sale of products and services to the “ultimate consumer;”

(4)       Absolutely rejects programs in which distributor product purchases are made in unreasonable amounts, either for resale or actual personal and family use; and

(5)       Demands, as a condition of legitimacy that companies adopt a repurchase policy in which terminating distributors will be refunded for returned product inventory, in resalable condition, that has been purchased within 12 months of termination.

All of this is not to say that the direct selling industry does not take self-regulation and protection of the consumer very seriously. The Direct Selling Association Ethics Code is replete with consumer protections, from prohibitions on inventory loading to unsubstantiated earnings claims to mandates of inventory buyback from terminating distributors. And leading members of the industry are already implementing technology solutions to track the segmentation of distributors and non-distributor users of products. In addition, many leading companies have instituted reclassification programs in which distributors who use product regularly, but do not really “work the opportunity,” can be reclassified into “preferred customer” programs that carry favorable pricing and a host of consumer benefits and incentives. These efforts at self-regulation will continue, regardless of legislation, and are the type lauded by Chairperson Ohlhausen. To some extent, such undertakings are a “down payment” on reciprocal cooperation by the FTC.

Carpe Diem… Seize the Day… We Are All Stakeholders

Just as Chairperson Ohlhausen has invited all stakeholders to the table to discuss how to implement the nuances of the Koscot line of cases, the direct selling industry should invite the FTC, as a stakeholder, to participate in the development and enactment of H.R. 3409.

Why is H.R. 3409 a great discussion topic for these “stakeholders?” Well, of course, cooperation and collaboration and good will are good goals.  But those lofty goals do not produce certainty and predictability if there is no objective standard or rule of law.

No one will argue with the fact that FTC staffs change; that, over time, FTC commissioners change; and that there is a long history of FTC vacillation on policy and enforcement. It is well past time for some objective guidance.

Will this dialogue go anywhere? Can the parties achieve some certainty for this channel of distribution? Hard to say… Hopefully, yes. We have been down this road before. But it is important to remember, as Prime Minister Indira Gandhi once said, “you cannot shake hands with a clenched fist.”

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Jeff is a graduate of the University of Southern California Law School. He is an active member of the State Bars of California and Oregon.

Guest Post by Jeff Babener
Search for Certainty in Direct Selling: A Legal and Business Rationale for H.R. 3409

Executive Summary: The legal environment and the accepted business model of leading direct selling companies has been relatively stable for 50 years. That equilibrium was upset by the regulatory proposals of a former FTC commissioner to upend that environment with new arbitrary rules that lack a basis in case authority or legislation… creating confusion in today’s direct selling market place. H.R. 3409, a mirror of many established state anti-pyramid statutes and the language of long adopted case authority, is intended to return predictability and stability and certainty to that market.

Like a poem poorly written
We are verses out of rhythm
Couplets out of rhyme
In syncopated time
Paul Simon, The Dangling Conversation

How We Got Here… Talking Past One Another

Creating Uncertainty and Confusion in an Established Market

He was born on third, but thought he hit a triple.

In July, 2016 the FTC concluded an investigation and settlement with Herbalife, without formal prosecution or litigation. No finding of wrong doing was made and no finding of “pyramid.” A substantial fine was paid. More significantly, Herbalife was obliged to radically change its MLM operating model to an extent that differentiated it from most other leading direct selling companies.

Industry observers postulated that the FTC had achieved by settlement a result that it could not have achieved through protracted litigation. And so why the result? Many experts, who follow the industry and FTC, understood the dynamics of why a publicly traded company, in the midst of a multi-year short seller attack (where its stock had spanned a volatile range of $27 to $80 over a four year period) might accede to onerous terms to bring an end to a cloud of uncertainty over its business. Many would argue that it was just a prudent move at a particularly vulnerable point of time in the financial markets. Interestingly, the fine paid was eclipsed by the surge in market cap and stock valuation as a result of the settlement, a fact that did not elude Wall Street.

Herbalife may have prevailed financially, but the FTC was playing “long ball” in terms of its long term legal position. Would the bevy of operating restrictions carry over to a change in the legal environment for the entire direct selling industry? Was the FTC emboldened to approach the direct selling industry as if it had just changed the direction of direct selling law unilaterally by settlement as opposed to achieving a change in the law by persuading a court to change the rules? Absolutely. Did it really change direct selling law? Well, sometimes history is written by the victor, whether correct or not. Or maybe that’s for the historians.

Post FTC/Herbalife Settlement, former FTC Chairwoman, Edith Ramirez, in her October, 2016 presentation to the U.S. Direct Selling Association, announced a vision for a new FTC paradigm outlook on legitimate direct selling that was totally at odds with decades of case authority, state legislation and operating models of a 50-year-old industry. To many observers, her position seemed to be drawn from “whole cloth” and fashioned as a “top down” bureaucrat “take it or leave it” style, i.e., “That’s the way it is, live with it!,” and “We know better than you…too bad.” Her position stunned CEOs of major direct selling companies. (The anxiety was heightened by another long time, and industry criticized, tactical practice of the FTC, referenced in the industry as “trial by ambush,” in which the FTC filed for a temporary restraining order and asset freeze at commencement of suit…leaving a company without any funds to defend itself… another issue for another day…)

My Way or the Highway… Bending the Arc of Direct Selling History

Her new theory of legitimate (vs. pyramid) direct selling was premised on a percentage analysis of non-participant consumption (perhaps mandating as high as two-thirds requirement to meet the FTC’s new standards), i.e., that the acid test for pyramid was demonstration of consumption by non-participants rather than the 40-year-case-standard established in the famous Koscot case, demonstration of consumption by the “ultimate user,” which could be either a non-participant or a participant…. in one “fell swoop” distributors who used product became “second class” ultimate users and direct selling companies were on notice that their model, one that long recognized personal use and one that the FTC as late as its 2004 Advisory opinion recognizing personal use, was in jeopardy.

Almost by fiat, she announced proposed upcoming FTC guidance (as of 2017, not yet issued) that would require complete overhaul of the model of many leading direct selling companies:

(1)       She renounced use of the famous Amway Safeguard Standard, adopted in the landmark FTC case, In re Amway, 1979 as being irrelevant, overrated and not really relied on by courts in pyramid cases.

(2)       She redefined the famous Koscot standard to require compensation to upline to be based on sales to the nonparticipant retailer customer rather than the Koscot’s language, ultimate user, effectively making distributors “second class” “ultimate users.”

(3)       She pivoted away from a legal analysis in the most recent BurnLounge case, which demanded, in pyramid cases, a factual analysis of the “primary motivation” test in which a court asks “what is the primary motivation for distributors when they make purchases”…instead migrating to a punch list of operating restrictions imposed on Herbalife in its recent settlement.

(4)       She essentially described a new legal standard, the percentages test, an arbitrary new rule in which upline distributors were limited to receive commission credit for only one-third of sales volume attributed to personal use by downline distributors, whether or not such purchases were reasonable in quantity and for actual use by the distributor “ultimate user.”

(5)       She announced that a long time practice of almost all leading direct selling companies, autoship to distributors, should be prohibited.

(6)       She pivoted away from a well-established component of leading direct selling programs, stating that monthly activity volume requirements may not include any purchases by distributors.

(7)       She asserted that the long time practice of established direct selling companies, tracking of performance activity connected to wholesale purchasing should be banned.

In the absence of “inventory loading,” almost all of the new restrictions on long standing industry “practices” had never been of particular concern in 40 years of cases or robust legislation at the state level.

All in all, a Molotov cocktail was thrown into the garden of direct selling occupied by icons like Avon, Mary Kay, Amway, etc.

Confusion Gives Birth to H.R. 3409?… Time for Clarity

Nature abhors a vacuum… Markets abhor uncertainty…

It was, as if the former Commissioner was talking right past those companies and models that had marshalled an important American economic channel for decades. Actually, right past case history and precedent.

A $36 billion industry had lived with and understood court guidelines for many decades, but the Chairwoman proposed to upend 40 years of legal precedent to bend the arc of direct selling history.

Did industry leaders feel ambushed? Well, that is a “charged” word… but, yes. Direct selling executives were rooted in the stability of historical case authority and state legislation respecting the role of personal use and rooting legitimacy in the Koscot standard, rewards must be related to sales to ultimate users (which includes personal use in reasonable amounts by distributors), the Amway standard, which asks companies to mandate that distributors achieve some level of retail sales, adhere to the 70%-rule which prohibits reorders unless distributors have resold product or used it for personal use in an amount of at least 70% and offer a reasonable repurchase policy for repurchase of inventory of terminating distributors, and the BurnLounge standard that rejected the FTC argument against recognition of the validity of personal use and opted for a case by case factual analysis of “primary intent” of distributor purchasing rather than a lock step rigid rule.

Was it a wholesale rejection of legal precedent and legislative standards? Probably. Did it veer away from standards carefully formulated in famous case precedents of Koscot, Amway, BurnLounge? Yes. Did it part company with the FTC’s own 2004 Advisory Opinion accepting the validity of “personal use” recognition, all the way to the point of even suggesting that the concept of MLM buying clubs was commendable? With all due respect, Yes. Did the position even conflict with the BurnLounge deposition testimony of the FTC’s own economist, who recognized the validity of personal use? Yes. Did the Commissioner’s position ignore the clear and growing trend in at least a dozen states where legislation called out the recognition of distributor personal use as a valid end destination to the ultimate user? Yes. Again, respectively, this state trend was missed altogether. (Actually, the Direct Selling Association points out that at least 21 states have adopted anti-pyramid legislation that also mirrors the anti-inventory loading/repurchase requirements seen in H.R. 3409.) Whether or not this omission was merely an oversight, who knows?

A close point by point FTC “fact check” is worthy of a read and a cup of coffee: Fact Checking the FTC’s New Legal Guidance 

For those of a more studious nature, check out the detailed analysis on the evolving legal standards in case authority (including Koscot, Amway and BurnLounge) and at the legislative level: BurnLounge Appeal Decision: Guidance on Pyramid v. Legitimate MLM and the Role of Personal Use in Pyramid Analysis

Also see legal analysis of the FTC punch list of operational restrictions arising from the Herbalife settlement: FTC v. Herbalife: Post-Settlement Legal Guidance for the Direct Selling Industry

“Anxious” is the understatement for the business environment promoted by Chairwoman Ramirez. Her position on legitimacy challenged the models of virtually every direct selling company. And with the foregone expectation that an even greater regulatory regime would inherit the White House in November, 2016, there was an expectation of “but wait there’s more, not less, regulation coming…so live with it.”

And then “poof,” the totally unexpected happened in the November, 2016 election. An anti-regulation President was elected with the opportunity to nominate a new majority of the FTC; the designated head of a “deregulation” task force was named, the largest shareholder of one of America’s leading direct selling companies; and within months of the election, the term of FTC Commissioner Ramirez came to an end.

And thus uncertainty replaced anxiety in the direct selling industry… which brings us to the legal and business rationale for pending H.R. 3409, denominated the Anti-Pyramid Promotional Scheme Act of 2017… for the first time in history, proposed federal anti-pyramid legislation.

Two Different Views of H.R. 3409… the Next Challenge

Can you hear me now?… the Verizon guy…

Pending before Congress is H.R. 3409, a bi-partisan bill entitled the Anti-Pyramid Promotional Scheme Act of 2017.

It is the first of its kind at the federal level. Interestingly, anti-pyramid statutes have been enacted in almost all states for half a century, and specific anti-pyramid laws that are almost identical to proposed H.R. 3409 have provided guidance for more than 20 years in more than a dozen states.

However, no federal anti-pyramid statute has ever appeared on the books. The FTC Act Section 5 broadly prevents “unfair or deceptive practices,” and yet it has been the principal vehicle for anti-pyramid enforcement other than the SEC and U.S. Department of Justice, whose mandate is to prosecute fraud, securities fraud and securities violations.

The stated purpose of H.R. 3409: To amend the Federal Trade Commission Act to prohibit pyramid promotional schemes and to ensure that compensation is not based upon recruitment of participants into a plan or operation, but on sales to individuals who use and consume the products or services sold, and for other purposes.

Now, does that sound any more controversial than the “mother and children protection act of _____.”  Well, guess again. Opponents of H.R. 3409 see a wolf in sheep’s clothing. They see it as a bill that seems innocuous on its face, but that is really intended to rob the FTC of its flexibility to chase after any pyramid scoundrel by actually defining the parameters of a pyramid rather than allowing the FTC to employ a vague statute, without specificity, to chase after direct selling businesses with assertions that their practices are “deceptive and unfair.”  In other less democratic countries, critics refer to such styles of governance as “a government of ‘men’ as opposed to a government of ‘laws.’”

The bipartisan sponsors of H.R. 3409 and the direct selling industry, led by the Direct Selling Association, assert that the legislation is anything but “flim flam.”  And quite honestly, a close look at H.R. 3409 does make it difficult to believe that it is anything other than robust consumer protection legislation…and that the “boogey man” is not hiding around the bend, ready to pounce on the innocent consumer. In fact, H.R. 3409 comes down like a sledge hammer on scams and schemes:

(1)       It condemns inventory loading;

(2)       It calls out as evil pyramid headhunting recruitment schemes;

(3)       It forbids payment of commissions or rewards that are unrelated or not based on sale of products and services to the “ultimate consumer;”

(4)       It absolutely rejects programs in which distributor product purchases are made in unreasonable amounts, either for resale or actual personal and family use;

(5)       And it demands, as a condition of legitimacy that companies adopt a repurchase policy in which terminating distributors will be refunded for returned product inventory, in resalable condition, that has been purchased within 12 months of termination.

If there is any new concession to the industry, it is that, in the course of protecting the consumer, H.R. 3409 also codifies case authority and state legislation in recognizing the legitimacy of reasonable personal use by distributors as being a sale to an “ultimate user.”

And there lies the rub… the parties are talking past each other…and in the words of Larry David’s grandmother… everyone is farmisht (confused as to what is the state of the law for legitimate direct selling). It is difficult to imagine that anyone could cogently argue that “uncertainty” is a good thing for a 50 year old channel of distribution in the U.S. H.R. 3409, at the very least, provides a good starting template for input from all groups of good will, consumer groups, the FTC, Congress, the States and the direct selling industry. Perhaps, even the President, who has served as a spokesperson for at least two MLM companies, will place this issue on the Executive Branch anti-regulation task force agenda.

Why H.R. 3409?…  Just One More Reason… Time for Clarity and Certainty in the Markets

It is hard to stand on shifting sands.

In the absence of some definitive resolution, the collision of the Ramirez FTC paradigm and the half century model of direct selling and 40 years of federal case authority and state legislative authority produces nothing but operational paralysis for a $36 billion industry and its 20 million participants.

Proponents and opponents of H.R. 3409 may debate ad infinitum on the goals of protecting the consumer or protecting the rights of direct selling distributors. But, a very clear unenunciated reason for passage of H.R. 3409 is that the overreaching positions of the FTC have created total uncertainty in the marketplace, and H.R. 3409 brings clarity and synchronicity to actual case authority and a clear federal standard that allows “business to be business” again. H.R. 3409 bursts the bubble of confusion.

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Amway

While Amway’s leadership position is far from being under any threat at least for a few years ahead (world #2 Avon’s 2016 sales is $5.7B), the trend after 2013 does not look so positive. Amway’s sales dropped from $11.8B in 2013 to $8.8B in 2016, or by $3B, or by almost 25%.

The company’s revenue development between 2010-2016 is presented below:

Following the results in 2016, Amway Chairman Steve Van Andel was satisfied. “Across the world, Amway did well in 2016. We experienced sales growth in several top markets, saw double-digit percentage growth in nine additional markets, and continued to evolve the business in China as we seek to take advantage of shifting market conditions and achieve the market’s long-term growth potential,” he said.

He added, “We are pleased to see the continued and growing relevance of the direct selling model in today’s marketplace as people place real value on personal recommendations, and technology enables our distributors to connect with customers at any place, at any time.”

Product Categories

Once again, nutrition line made up the largest category once again, in 2016. Its share was 49% (up 3% from 2015). Amway’s top-selling nutrition products are reported as Nutrilite Protein Powder, Double X / Triple X, and Vitamin C Plus. Euromonitor announces Nutrilite as the world’s #1 selling vitamins and dietary supplements brand.

Amway’s second largest category was beauty with a 25% contribution (the same as 2015). The most famous brand in this category is Artistry and again, based on Euromonitor reports, Amway says this line is among the world’s top five, largest-selling, premium skincare brands.

Home products was Amway’s third largest category. It had 22% share in 2016. This category breaks down into durables (15%, down 1% from 2015) and home care (7%, the same as 2015). Within this category, Amway’s top-selling home durable product was eSpring water filtration systems, and top-selling home care product was Dish Drops Concentrated Dishwashing Liquid.

Markets

Amway reports it has operations in more than 100 countries and territories, with over 19,000 employees.

The top 10 markets for Amway in 2016 were China, United States, South Korea, Japan, Thailand, Taiwan, India, Malaysia, Russia and Hong Kong.

This “Top 10” list in 2015 was as follows: China, South Korea, United States, Japan, Thailand, Russia, Taiwan, Malaysia, India and Ukraine.

Amway said nine of its markets in the world experienced double-digit percentage growth, compared to 2015 figures. The company did not identify these markets nor did it release any sales figures for individual countries. Amway reported it had lower sales in China, in its biggest market, for the third straight year in 2016. Company’s President Doug DeVos commented on Amway’s performance in China, “We’re struggling a bit here now,” and said the China business was suffering from “a direct selling cycle” and faced growing competition, with more than 90 direct selling companies now operating in the country.

2017

Looking forward to 2017, Amway management is optimistic pointing to:

* Millennials’ increasing interest into Amway: In the U.S, for example, majority of individuals who started an Amway business in 2016 were millennials, according to Amway.

* The new product categories exceeding their expectations: The XS brand of energy drinks, snacks and sports nutrition products achieved 40% growth in 2016.

* The convergence of product categories, such as nutrition and beauty, showing strength: Newly launched Truvivity by Nutrilite, a supplement focused on skin hydration, is exceeding sales estimates success has been found in pairing this product with premium skincare lines.

For more on Amway’s 2016 results, please click here and here.

…..

Hakki Ozmorali is the Principal of WDS Consultancy, a consulting firm specialized in providing services to direct selling firms. He is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication. He is an experienced professional with a strong background in direct sales. Hakki was the first corporate professional in the Turkish network marketing industry. His work experiences in direct selling include Country Manager roles at Oriflame, Herbalife and LR Health & Beauty Systems, and Regional Director, North America role at Lifestyles Global Networks.

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NU SKIN

Nu Skin came up with $531 million quarterly and $2.208 million annual sales. As compared to previous year, these figures were down 7% and down 2%, respectively. 2016 was also Nu Skin’s third year in a row with a negative sales performance.

The only positive growth performance came from Nu Skin’s smallest region, EMEA in the last quarter (+21%). All of the remaining four regions reported revenue decreases: Americas -25%, China -7%, South Asia-Pacific -6%, and North Asia -4%.

“The fourth quarter of 2016 showed a decline against 2015 due to approximately $50 million of product launch revenue in the fourth quarter of 2015,” said CEO Truman Hunt. “Revenue in the fourth quarter of 2016 was also negatively impacted by $7 million of deferred revenue, primarily from a stronger-than-anticipated response to a promotion of ageLOC Me cartridges in China where orders outstripped our supply.”

The company had previously announced management transition. This time an update came saying in the next few weeks, a new chief financial officer was expected to be named. At that time, Truman Hunt will become vice chairman of the board, and Ritch Wood will assume the position of CEO, and Ryan Napierski will become the company’s president.

For the first quarter of 2017, Nu Skin anticipates revenue of $480-$500 million, and for 2017, revenue of $2.26-$2.30 billion. Both targets are slightly above company’s 2016 figures.

For more on Nu Skin’s 2016 performance please click here and here.

ORIFLAME

In 2016’s last quarter, Oriflame increased its sales by 5% to €355. Oriflame’s 2016 sales was up 3%, too, reaching €1.249B.

The company has been posting negative growth every year since 2011. So, 2016 might be marking a reverse in this negative trend. However, Oriflame’s 2016 revenue figure is still far from what it was in 2011 or 2012 (approx. €1.5B).

CEO Magnus Brannstrom said, “2016 was a year when we made significant steps to improve the overall position of Oriflame… It was a year when we returned to Euro growth, delivered double-digit local currency growth and increased the profitability each consecutive quarter – despite challenging market conditions and deteriorating macro.”

In 4Q, Oriflame’s unit sales decreased by 4% but the price/mix effect was up by 12%, pushing the revenue up.

Geographically, 4Q sales growth in Asia & Turkey was up 23%, in Latin America up 12%, in Europe & Africa down 2%, and in CIS region down 10%.

Oriflame celebrates its 50th anniversary this year, a remarkable milestone, of course.

For more on Oriflame’s 2016 performance please click here and here.

TUPPERWARE

Tupperware reported $601 million sales in the fourth quarter, representing a 1.5% increase from last year.

However, this was not enough to compensate the revenue losses in the first three quarters. So, Tupperware’s yearly sales growth performance was -3% as compared to 2015. With 2016, Tupperware’s sales has been declining for the third consecutive year.

Last year, the company’s sales figures suffered the most in its “Beauty North America” segment (-21%). Then came Europe (-9%), and Asia-Pacific (-3%). South America made a positive contribution by 17% and Tupperware North America by 1%.

As of end-2016, Asia-Pacific was Tupperware’s largest business unit with a 34% share. Europe’s contribution was 25%, Tupperware North America’s, 16%, South America’s 16%, and Beauty North America’s 9%.

Rick Goings, Chairman and CEO, commented, “We experienced a challenging fourth quarter to cap off an already tough 2016… Despite the impact of further economic and political instabilities, our businesses in emerging markets continued on a growth trajectory in the fourth quarter with outstanding results in Argentina, Brazil, China and Tupperware South Africa.”

For 2017, management expects 0-2% sales increase in USD terms, globally. At the segment level, sales are expected to be down low-single digits in in Europe and Asia Pacific, about even in Tupperware North America, down mid-to-high teens in Beauty North America and up in South America by 22 to 24%.

For more on Tupperware’s 2016 performance please click here and here.

AMWAY

This quarterly growth review has focused on the six largest public companies, since the beginning. This had two reasons: First, to give a general picture without boring the readers with so many companies’ figures; second, we only have access to public companies’ reports in detail.

As a private company, Amway has been reporting its yearly results regularly recently. So, we have been adding this giant’s figures to the year-end reviews, too.

Amway reported $8.8 billion sales in 2016. This meant 7% decline from 2015. Worse than that is, it also meant Amway was having declining sales in each of the last three years. Sales was $11.8B in 2013 when it peaked, then it went down to $10.8B in 2014, and to $9.5B in 2015. Even with this figure, Amway is still the world’s largest direct seller.

Chairman Steve Van Andel was not unhappy, though, saying, “Across the world, Amway did well in 2016. We experienced sales growth in several top markets, saw double-digit percentage growth in nine additional markets, and continued to evolve the business in China as we seek to take advantage of shifting market conditions and achieve the market’s long-term growth potential.”

Amway reported its sales by product category in 2016 as follows: Nutrition 49% (+3% from 2015); beauty and personal care 25% (same as 2015); durable products, 15% (-1% from 2015); home care 7% (same as 2015); other, 4%(-2% from 2015).

Company’s top 10 markets in 2016 were: China, United States, South Korea, Japan, Thailand, Taiwan, India, Malaysia, Russia and Hong Kong. Amway said it enjoyed increased sales in seven of these top 10 markets.

For more on Amway’s 2016 performance please click here.

We have only few weeks left until the end of the first quarter. Following that, we will be looking at these companies’ quarterly reports to see how they kicked-off 2017.

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Hakki Ozmorali is the Principal of WDS Consultancy, a consulting firm specialized in providing services to direct selling firms. He is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication. He is an experienced professional with a strong background in direct sales. Hakki was the first corporate professional in the Turkish network marketing industry. His work experiences in direct selling include Country Manager roles at Oriflame, Herbalife and LR Health & Beauty Systems, and Regional Director, North America role at Lifestyles Global Networks.






 
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